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South Africa Pushes for Company Debt Under Basel Liquidity Rules

South Africa will push global banking regulators next month to amend liquidity rules so that lenders can include some corporate debt in the asset buffer they must hold against a possible credit squeeze.

The Basel Committee on Banking Supervision is considering changes to the liquidity coverage ratio, or LCR, that requires lenders to hold enough easy-to-sell assets to survive if they’re shut out of credit markets for 30 days. The committee’s standard, part of an overhaul of regulations known as Basel III, has been criticized by governments and banks as too restrictive because few assets other than sovereign debt would qualify.

Rene van Wyk, who represents South Africa’s central bank on the committee, said corporate debt rated higher than the country’s sovereign bonds would qualify as “highly liquid” under the proposed amendment. “If the local ratings are done by a creditable rating agency they would be able to pierce the sovereign ceiling for Basel,” he said by telephone.

Without the rule change, South African lenders may fall about 260 billion rand ($31 billion) short of the assets they would need to meet the liquidity coverage ratio, according to Van Wyk. This figure is based on the assumption that five significant banks would simultaneously experience a run by depositors, he said.

Superior Ratings

South Africa’s long-term debt is rated A3 by Moody’s Investors Service and BBB+ by Standard & Poor’s and Fitch Ratings. Some of the country’s largest companies, including Barclays Plc’s Absa Group Ltd., diversified mining stock Anglo American Plc and the world’s largest forklift dealer, Barloworld Ltd., have issued debt this year with credit ratings superior to the sovereign level.

Basel’s secretariat has agreed that the local, stand-alone rating of a corporate bond mustn’t be “capped” by the sovereign rating of the country in which it operates, Van Wyk said. If the committee agrees, South Africa’s proposed bank bailout facility may be unnecessary, according to Van Wyk.

The proposed change would also help to promote South Africa’s corporate debt market, Van Wyk said.

The market isn’t “as liquid as you would want, but I’m sure that with the Basel regulations, if national scale is what counts, then it provides help for the development of bond markets,” he said. Companies would have an incentive to raise cash by issuing debt instead of taking bank loans, he said.

‘Exceptional Conditions’

The Basel committee is targeting a deal by January 2013 on revising the LCR amid warnings that the standard may hamper economic growth and efforts to tame the euro area’s debt crisis. Bank of England Governor Mervyn King said in June that “current exceptional conditions” meant that “the need for banks to hold large liquid asset buffers is much diminished, and I hope regulators around the world will take note.”

“If Basel does accept national-scale ratings, it will be a stronger incentive for banks to encourage their larger clients to list debt on Johannesburg’s stock exchange rather than doing direct loans,” Elena Ilkova, a Johannesburg-based credit analyst at FirstRand Ltd.’s RMB Global Markets, said by telephone. “It’s very difficult to determine how big the market is going to be.”

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